New Economics Papers
on Financial Markets
Issue of 2008‒04‒21
five papers chosen by

  1. Asymmetric News Effects on Volatility: Good vs. Bad News in Good vs. Bad Times By Laakkonen, Helinä; Lanne, Markku
  2. The Propagation of Financial Extremes: An Application to Subprime Market Spillovers By Chollete, Lorán
  3. Multi-asset Spread Option Pricing and Hedging By Li, Minqiang; Deng, Shijie; Zhou, Jieyun
  4. Eliminating Biases in Evaluating Mutual Fund Performance from a Survivorship Free Sample By Jenke R. ter Horst; Theo E. Nijman; Marno Verbeek
  5. "Term Structure of Interest Rates under Recursive Preferences in Continuous Time" By Hisashi Nakamura; Keita Nakayama; Akihiko Takahashi

  1. By: Laakkonen, Helinä; Lanne, Markku
    Abstract: We study the impact of positive and negative macroeconomic US and European news announcements in different phases of the business cycle on the highfrequency volatility of the EUR/USD exchange rate. The results suggest that in general bad news increases volatility more than good news. The news effects also depend on the state of the economy: bad news increases volatility more in good times than in bad times, while there is no difference between the volatility effects of good news in bad and good times.
    Keywords: Volatility; News; Nonlinearity; Smooth Transition Models
    JEL: C32 G15 F31
    Date: 2008
  2. By: Chollete, Lorán (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: What drives extreme and rare economic events? Motivated by recent theory, and events in US subprime markets, we begin to open the black box of extremes. Specifically, we build a taxonomy of extremes, then extend standard economic analysis of extreme risk. First, we model the potentially relevant dimensions of dynamics and endogeneity. In characterizing individuals' endogenous propagation of extremes, we relate the latter to public goods. Second, using over a century of daily stock price data, we construct empirical probabilities of extremes. We document that extremes are relatively frequent and persistent. We find evidence that extremes are endogenous, raising the possibility that control of extremes is a public good.
    Keywords: Extreme event; Subprime Market; Dynamics; Endogeneity; Public Good
    JEL: C10 E44 E51 H23 H41
    Date: 2008–01–31
  3. By: Li, Minqiang; Deng, Shijie; Zhou, Jieyun
    Abstract: We provide two new closed-form approximation methods for pricing spread options on a basket of risky assets: the extended Kirk approximation and the second-order boundary approximation. Numerical analysis shows that while the latter method is more accurate than the former, both methods are extremely fast and accurate. Approximations for important Greeks are also derived in closed form. Our approximation methods enable the accurate pricing of a bulk volume of spread options on a large number of assets in real time, which offers traders a potential edge in a dynamic market environment.
    Keywords: multi-asset spread option; closed-form approximation
    JEL: G13
    Date: 2008–01
  4. By: Jenke R. ter Horst; Theo E. Nijman; Marno Verbeek
    Abstract: Poor performing mutual funds are less likely to be observed in the data sets that are typically available. This so-called survivor problem can induce a substantial bias in measures of the performance of the funds and the persistence of this performance. Many studies have recently argued that survivorship bias can be avoided by analyzing a sample that contains returns on each fund up to the period of disappearance using standard techniques. Such data sets are usually referred to as 'survivorship free'. In this paper we show that the use of standard methods of analysis on a 'survivorship free' data-set typically still suffers from a bias and we show how one can easily correct for this using weights based on probit regressions. Using a sample with quarterly returns on U.S. based equity funds, we first of all model how survival probabilities depend upon historical returns, the age of the fund and upon aggregate economy-wide shocks. Subsequently we employ a Monte Carlo study to analyze the size and shape of the survivorship bias in various performance measures that arise when a 'survivorship free database' is used with standard techniques. In particular, we show that survivorship bias induces a spurious U-shape pattern in performance persistence. Finally, we show how a weighting procedure based upon probit regressions can be used to correct for the bias. In this way, we obtain bias-corrected estimates of abnormal performance relative to a one-factor and the Carhart [1997] four-factor model, as well as its persistence. Our results are in accordance with the persistence pattern found by Carhart [1997], and do not support the existence of a hot hand phenomenon in mutual fund performance.
    Date: 2008–03
  5. By: Hisashi Nakamura (Faculty of Economics, University of Tokyo); Keita Nakayama (Graduate School of Economics, University of Tokyo); Akihiko Takahashi (Faculty of Economics, University of Tokyo)
    Abstract: This paper proposes a testable continuous-time term-structure model with recursive utility to investigate structural relationships between the real economy and the term structure of real and nominal interest rates. Under mean-reverting expectation on real output growth and inflation, this paper finds that, if interest rates tend to be high during economic booms, then a real yield curve slopes up when, and only when, late resolution is preferred strongly enough. Also, even when the real yield curve slopes down, the nominal yield curve may slope up when expected inflation is negatively correlated with the real output growth.
    Date: 2008–01

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